Get the Best Deal on a Car By Reading the Sales Contract

A car is usually the largest purchase you’ll make until you buy a home. I’m sure you’ve got some tactic, scheme, or trick you use when trying to negotiate the best deal on a new car. But what’s most surprising is that people don’t understand how to read a sales contract when it’s the real key to actually getting a “good deal”.

What the sales contract makes obvious, and what most people fail to realize, is that purchasing a car must really be broken down into three parts: financing the sale, purchasing the car, and insuring the vehicle. This means that there are three separate transactions you must make before actually driving your car off the lot.

So, how does someone pay $14,143 for a car listed at $8,950?

If we examine the sales contract below, it tells the story of how a car with a sticker price of $8,950 can end up costing $14,143.76. When you factor in all the extra costs of purchasing a vehicle like finance charges, down payments, insurance premiums, and miscellaneous extras the actual cost can nearly double! But here’s the kicker: If I were to pitch you this car, you would only have to pay $295 per month for 36 months. Do advertised offers like this look familiar? Crazy right….

By paying attention to the details, you’ll have all the information you need to negotiate the best deal. Lets take a closer look at a real example of an official automobile sales contract required in the State of California under the Car Buyer’s Bill of Rights FFVR 35.

Seriously… Do they actually expect you to read all that?

Of course not, which is why they keep you at the dealership for hours before they take you to the “back room” and hit you with this overly complex contract with numbers that hardly make sense.

From my experience, most people focus too much of their efforts comparing and negotiating a lower sticker price or MSRP on the car they want. But besides associating a low monthly payment with a good deal, trying to get the “dealer-invoice price” is one of the most common diversions you’ll probably encounter.

OK, lets break this down into 4 easy to read sections labeled in the contract above:

1. Financing Disclosure and Vehicle Sales Overview:

This section is an overall summary of the total cost of purchasing the car. It will include the annual percentage rate (APR) of your loan, the down payment amount, and the total cost of purchasing the car. Refer to this section for a quick overview of what the total cost of the car will be, the number of monthly payments, and the amount due each month. In our example, you’ll start to notice how quickly these numbers can add up.

Finance Charges – The total cost of interest over the term of the loan ($3,106.86)

Amount Financed – The total dollar amount borrowed ($7,537.10)

Total of Payments – Amount Financed + Finance Charge = $10,643.76

Total Sale Price – Total of Payments + Down payment = $14,143.76

2. Additional Fee Disclosure and Breakdown:

This section is an itemization of all the miscellaneous fees not including finance charges. This section includes extras like license and registration fees, smog and emissions fees, other optional fees, and the down payment. Most of the items that can be listed here will be optional; however, some of the items in this section are standard or mandatory such as:

Document Processing

Emissions Testing

License Fees

Registration Fees

Taxes

Although this section can account for a lot of miscellaneous charges, it may not be worth your time to negotiate over a $65 document processing fee. Instead I would focus most of your efforts on the dealer fees, down payment, or any other (Optional) listed fees. Pay close attention to this section because a lot of dealerships will offer additional services or high-markup items and list them here. A lot of up sell can happen in this section of the contract, such as a $995 optional fee paid for an unspecified item!

3. Statement of Insurance:

This section is where your current insurance coverage is listed and additional forms of coverage like gap insurance, additional equipment coverage, and credit insurance are detailed. In our example, we can see that insurance has been added to cover the vehicle’s wheels for up to 2,400 miles or 24 months.

Believe it or not more than a few people neglect the fact that, if they are financing a car, most dealerships will not let them drive off the lot unless the vehicle is properly insured. This means that in addition to the state minimum amount of liability insurance, they will also be required to get comprehensive and collision coverage (full coverage). The only way around this is to pay off the car in full.

Typically, I recommend that you have your insurance sorted out prior to even stepping foot on the lot. I more often than not would pass on most the additional forms of insurance coverage when purchasing a vehicle unless they are included for free. However, one form of additional coverage you should consider when buying a new car is GAP insurance. I would not recommend purchasing GAP on a used vehicle.

4. Contract Amendments and Endorsements:

This section is where they jam in all the legal sales jargon into the contract. Make sure you at least give this section a good read through because it will state your rights and the dealer’s rights during the sale. A lot of the time this section will show requirements and other notices the dealership must notify you of like your contract cancellation rights, trade-in rights, and how any legal disputes will be resolved.

I can’t stress enough that you must read and understand this section. From my experience by the time you get to this section, most people have been at the dealership for hours and just want to finish up. Don’t fall short now make sure you agree and understand all of the statements you are signing or it may come back to haunt you. Don’t be afraid to ask the dealer what their exchange and return policy is before signing anything.

Additional Information on Down Payments

Almost every dealership I have had contact with will attempt to charge you a down payment or stick you with a balloon payment. More often than not you can negotiate the amount be reduced, if not removed, depending your level of skill when it comes to negotiations. If you can pay sticker price for a car with $0 additional fees I can guarantee you will have paid less than 90% of all people who buy a car from a dealership. Sometimes dealerships advertise a low sticker price on their vehicles then attempt to make all their money on the back end. Use this to your advantage. Do not be afraid to walk away from a deal because of fees.

If you refer to section “1. Financing Disclosures and Vehicles Sales Details” of the sales contract, you can see that in addition to finance charges and other fees there is a high down payment placed on this vehicle; however, not all of it is applied to the actual value of the loan. Our example sales contract shows, the customer was charged a $3,500 down payment. When you look at section “2. Additional Fees Disclosure and Breakdown“, it shows the list price of the car at $8,950 and the amount financed to be $7,537.10. This means that only $1,412.90 of the $3,500 down payment was actually applied to the loan. The other $2,087.1 plus other miscellaneous fees probably went directly to the dealership.

By combining a great finance rate with negotiating lower dealership fees, you can really net some major savings. Hopefully you have a better understanding on how the sales process actually works. So get out there, and buy with confidence!

Raphael Locsin is the principal agent at Shift Insurance. His goal is to help individuals and companies alike protect their assets and manage liabilities. He created this blog as a way to compile industry knowledge, resources, and general information for the purpose of consumer education.